The leaders of the 33 boroughs in London have agreed to reduce the proposed cut to their voluntary sector grants programme by more than £3m.
The decision at a meeting yesterday means the programme will fall in value from £26m in 2010/11 to £20.77m in 2011/12, rather than to £17.69m as previously decided.
London Councils, which represents the capital's boroughs, decided in December to 'repatriate' funds from its £26m grants programme to individual councils, meaning they would be free to spend the money as they chose.
It would have meant the scheme being reduced to £17.6m in 2011/12 and to £9.9m the following year, if no new funding was found.
But after a judicial review brought by one of more than 200 affected charities, the High Court earlier this year told London Councils to re-run the consultation process with full equality impact assessments.
A statement from London Councils said it had since looked at the equalities impacts of each grant and used the results to inform its new budget decision.
Peter Lewis, chief executive of London Voluntary Service Council, said he was pleased the budget had been increased for 2011/12, but wanted to ensure the cuts did not become disproportionate in the future.
"We would like a really open process about what the programme looks like from this year," he said.
Paul Treloar, head of policy and communications at the welfare and social rights charity Lasa, which receives funding from London Councils, said he was relieved a decision had been made.
"It's been quite an arduous process for everyone concerned," he said. "We're hoping to be able to move forward now."
A spokeswoman for London Councils said the budget for the financial years after 2011/12 would be set later this year.
The grants report says there is no appeals process for organisations to challenge the decision made yesterday, citing reasons such as cost. Organisations with grievances about the decisions could seek judicial review, it says.
The net increase to the budget will be £1.1m because around £2m has already been spent on costs incurred by judicial review, including having to provide funding for some organisations for longer than anticipated.